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An increase in the Bank Rate generally indicates that the
1. market rate of interest is likely to fall
2. Central Bank is no longer making loans to commercial banks
3. Central Bank is following an easy money policy
4. Central Bank is following a tight money policy

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Correct Answer - Option 4 : Central Bank is following a tight money policy

The correct answer is Central Bank is following a tight money policy.

  • Bank rate refers to the rate at which the Central bank lends money to its clients for the long term.
  • An increase in this rate means that the Central bank is following a tight monetary policy as an increase in rates will lead to a decrease in money supply thereby leading to a decrease in inflation and a reduction in investment.
  • Hence option 4 is correct.

​​ 

  • What is a Cash Reserve Ratio?
    • Cash Reserve Ratio (CRR) is a specific part of the total deposit that is held as a reserve by the commercial banks and is mandated by the Reserve Bank of India (RBI). 
    • Significance of CRR
      • CRR is an important tool of the Monetary Policy that provides the following benefits:
      • CRR regulates the money supply and the level of inflation in the country.
      • CRR ensures the security of the reserved amount as the specific amount of the bank’s deposit is stored with the Reserve Bank of India which can be readily available as per the need of the customers.
      • CRR also has a major role to play during high inflation.
        • During high inflation, the Reserve Bank of India increases the CRR rate to reduce the amount of money that is available with the banks.
        • This reduces the excess flow of money in the economy.
      • During the need of funds, the government can lower the rate of the CRR to help the banks in providing loans to various businesses and industries for investment. A low rate of CRR also increases the growth rate of the economy.
  • Reverse Repo Rate
    • The reverse repo rate is the rate of interest that is provided by the Reserve bank of India while borrowing money from the commercial banks.
    • In other words, we can say that the reverse repo is the rate charged by the commercial banks in India to park their excess money with RBI for a short-term period.
    • The current reverse repo rate in India as of October 2019 is 4.90%.

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